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5.2 Profit and Loss Account

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24 views2 pages

5.2 Profit and Loss Account

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SAMEER
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Preparation of Financial Statements: Profit and Loss Account

Chapter – V

DISCUSSION POINTS:
The Basic objective of this chapter is to explain how the Trial Balance is prepared and the adjustments that
are to be identified in the preparation of the final accounts.

• Capital and Revenue Expenditure.

Capital and Revenue Expenditure

Capital Expenditure
Capital expenditure refers to expenditure that the benefit of which is not fully derived in one year but
spread over several periods. Examples for capital expenditure are – acquisition of assets for the purpose of
earning, additions to fixed assets to improve its capacity, expenditure resulting in long-term benefit to the
business, etc. Expenses like Preliminary expenses, Research and Development expenditure, Interest paid during
Construction period, etc. are taken to assets side of Balance Sheet and shown under „Miscellaneous Expenditure‟.
Revenue Expenditure
It is an expenditure incurred and the benefit of which is derived in the year in which the expenditure was
incurred. Examples are – raw materials, repairs, depreciation, rent, wages, etc. Such expenses are debited to
Profit and Loss account. Any incomes and gains are credited to Profit and Loss account. Examples are –
Commission received, Dividend received, Interest received etc. Net Profit is transferred to capital account
in the balance sheet.
A Simple Example: Profit and Loss Account
Given below is a simple example of a Profit and Loss account. You may notice that it starts with gross
profit (on credit side). If there is no separate Trading account all the debits and credits of Trading account
appear individually in the Profit and Loss account. Where a separate Trading account is prepared, only the
figure of gross profit (or loss as the case may be) appears in the Profit and Loss account as a starting point.
What is shown below is not an exhaustive list of expenses and incomes. It is a simplified version of a
typical Profit and Loss account without taking any “adjustments” to be made into account.
Profit and Loss Account for the period ending 31.3.2001
Dr. Cr.
Rs. Rs.
To Salaries 30,000 By Gross profit 2,25,000
To Printing & Stationery 15,000 By Rent received 2,000
To Postage & Telephone 2,500 By Other income 10,000
To Audit fee 4,000
To Office rent 5,000
To Insurance 10,000
To Repairs and Maintenance 5,000
To General Expenses 4,000
To Interest on loans 8,000
To Net profit transferred 1,53,500
to Reserves or Capital
2,37,000 2,37,000

Accounting for Managers


Preparation of Financial Statements: Profit and Loss Account

END POINTS:

• From a given Trial Balance we can prepare a Trading and Profit and Loss account to determine the
profit or loss made by a business organization during a particular period.

• Trading account is prepared to ascertain the Gross Profit. Gross profit is the difference between
sales and cost of goods sold.

• Profit and Loss account is prepared to ascertain net profit.

• It is necessary to emphasize here that Profit and Loss account (including Trading account) is
usually prepared on „Accrual‟ basis.

• There is no hard and fast rule about segregation of expenses between Trading account and Profit
and Loss account.

• Capital expenditure refers to expenditure that the benefit of which is not fully derived in one year
but spread over several periods.

Accounting for Managers

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